Cash Credit: Meaning, Benefits and How It Works

Cash credit is a popular short-term financing option for businesses to meet their working capital requirements. It provides flexibility to withdraw funds as and when needed, up to a pre-approved limit. If you’re a business owner looking for a convenient way to manage your cash flows, understanding how cash credit works can help you make informed decisions. In this article, we’ll explain the meaning of cash credit, its benefits, interest rates, and calculations.

Understanding cash credit

What is cash credit?

Cash credit is a type of short-term loan facility offered by banks to businesses to meet their working capital needs. It allows you to withdraw funds from a pre-approved limit as and when required, and you only pay interest on the amount utilized. Cash credit is typically secured against current assets like inventory or receivables.

Key Features of Cash Credit

• Revolving credit facility: You can withdraw funds multiple times up to the sanctioned limit.

• Flexible repayment: You can repay the borrowed amount at your convenience, as long as you maintain the minimum balance.

• Interest on utilized amount: Interest is charged only on the amount withdrawn, not on the entire sanctioned limit.

• Collateral required: Cash credit is usually secured against current assets or fixed deposits.

Benefits of Cash Credit

• Flexibility: Cash credit offers the flexibility to withdraw funds as per your business needs, without having to reapply for a loan each time.

• Cost-effective: You only pay interest on the utilized amount, making it a cost-effective financing option compared to term loans.

• Improves cash flow: With cash credit, you can manage your cash flows better by having access to funds when needed.

• Easy to obtain: Cash credit is relatively easier to obtain compared to other types of loans, as it is secured against current assets.

Cash credit interest rates

Interest on cash credit

The cash credit interest rate varies from bank to bank and depends on factors like the company’s credit profile, relationship with the bank, and collateral offered. Currently, the cash credit interest rate of all banks ranges from 8% to 15% per annum. It’s important to compare interest rates across banks to get the best deal.

Factors affecting cash credit interest rate

• Company’s credit profile: A good credit score and strong financials can help you negotiate better interest rates.

• Relationship with the bank: Having a long-standing relationship with the bank may lead to preferential interest rates.

• Collateral offered: The quality and type of collateral offered can impact the interest rates.

How to calculate cash credit interest?

To calculate interest on cash credit, you need to consider the utilized amount, interest rate, and tenure. Here’s the formula:

Interest = (Utilized amount x Interest rate x Number of days) / 365

For example, if you have utilized ₹10 lakh from your cash credit account at an interest rate of 12% for 90 days, the interest would be:

Interest = (₹10,00,000 x 12% x 90) / 365 = ₹29,589

Cash credit eligibility and documents

Who is eligible for a cash credit loan?

• Businesses with a minimum operational track record of 3 years

• Firms with a good credit profile and satisfactory bank account conduct

• Companies with adequate collateral to offer

Documents required for cash credit

• KYC documents of the company and its directors

• Audited financial statements for the last 3 years

• GST returns and bank statements

• Proof of collateral, such as property papers or fixed deposit receipts

How to apply for cash credit?

• Approach your bank and discuss your cash credit requirements.

• Submit the necessary documents and the duly filled application form.

• The bank will assess your eligibility and collateral offered.

• Upon approval, the cash credit facility will be sanctioned, and you can start utilizing the funds.

Managing your cash credit account

Tips for effective utilization

• Withdraw funds only when necessary to keep the interest costs low.

• Regularly monitor your cash credit account to ensure timely repayments.

• Maintain a good credit score by making payments on time.

• Review your cash credit limit periodically and request an increase if required.

Making repayments

• Ensure that you maintain the minimum balance in your cash credit account.

• Deposit funds into the account as and when possible to reduce the outstanding balance.

• Set up reminders for repayment dates to avoid missing them.

Airtel Finance offers a range of financial services, including credit score checks that can help you understand your creditworthiness before applying for a cash credit facility. You

can also explore personal loan options for your business needs.

Conclusion:

Cash credit is a flexible and cost-effective financing option for businesses to manage their working capital requirements. By understanding the meaning of cash credit, its benefits, interest rates, and calculations, you can make informed decisions for your business. Remember to compare interest rates, maintain a good credit score, and regularly monitor your cash credit account for effective utilization.

To get started with a cash credit facility, check your credit score for free using Airtel Finance and apply through the Airtel Thanks app. With a strong credit profile and proper documentation, you can easily avail of cash credit to meet your business needs.

FAQs:

1. Who gives cash credit?
   Banks and financial institutions offer cash credit facilities to businesses to meet their working capital requirements.

    

2. Can I withdraw cash from my cash credit account?
   Yes, you can withdraw cash from your cash credit account up to the sanctioned limit as per your business needs.

    

3. Who is eligible for a cash credit loan?
   Businesses with a minimum operational track record of 3 years, a good credit profile, and adequate collateral are eligible for cash credit loans.

    

4. What is the minimum balance required in a cash credit account?
   The minimum balance requirement in a cash credit account varies from bank to bank. It is usually a percentage of the sanctioned limit.

    

5. What is the interest rate for cash credit?
   The cash credit interest rate ranges from 8% to 15% per annum, depending on the bank, company’s credit profile, and collateral offered.

    

6. How is cash credit interest calculated?
   Cash credit interest is calculated using the formula: (Utilised amount x Interest rate x Number of days) / 365.

    

7. What is the minimum age required for availing a cash credit facility?
   The minimum age for availing a cash credit facility is 21 years for the directors of the company applying for the loan.

    

8. What is the meaning of cash credit?
   Cash credit is a short-term loan facility offered by banks to businesses to meet their working capital needs by allowing withdrawal of funds up to a pre-approved limit.